• The recent 2Q24 earnings season for 14 companies under our coverage were mixed, with slightly more than half were in line with expectations, with 5 below and 1 exceeding our projections. Farm Fresh Berhad (FFB) stood out as the star performer, with earnings surge by +308% YoY.

• We anticipate consumer sector will benefit from higher purchasing power driven by generous cash handout, EPF Account 3 withdrawal, civil servant wage hike, and higher anticipated tourist footprints.

• We turn more positive on consumer sector as a whole and have upgrade it to an OVERWEIGHT rating. We prefer staples goods and value-for-money discretionary items. Our top pick maintains MRDIY (TP: RM2.49).

2Q24 Earnings Mixed Outcome

The recent 2Q24 earnings season for the 14 companies under our coverage delivered mixed results. More than half of the companies reported earnings in line with expectations, while 5 fell short, and 1 exceeded projection (Spritzer). Under our coverage, FFB was the standout performer, with a significant earnings surge by +308% YoY to RM26mn during this quarter, driven by increased sales volume, contributions from new products, and a 10% revenue boost from the ice cream subsidiaries. Meanwhile, Spritzer outperformed primarily due to higher bottled water sales volume and reduced raw material costs. Overall, 2QCY24 sector earnings for the 14 covered stocks declined by -21.3% QoQ but surged by +31.4% YoY. The quarterly decline was mainly due to the absence of festive seasons, while the YoY increase was supported by a stable job market, low inflationary pressure, and heightened consumer spending driven by the EPF Account 3 withdrawal scheme, which commenced on May 1, 2024. In contrast, the FBM KL Consumer Index (KLCSU Index) underperformed relative to FBMKLCI Index by -11.6% YoY. We believe this is due to concerns over the commencement of the Subsidy Rationalisation Initiative (SRI), particularly for RON95, following the subsidy withdrawal for diesel which started on June 10, 2024.

Maintaining a Positive Outlook for the F&B Segment.

We are optimistic on the potential increase in consumer spending, which is expected to benefit F&B companies under our coverage. This is due to higher purchasing power stemming from the EPF Account 3 withdrawal which is estimated to be RM25bn in 2024, a civil servant wage hike that will boost RM10bn to consumer’s spending and Sumbangan Tunai Rahmah which cost the government in total of RM10bn. Additionally, the stable job market is expected to bolster consumer confident in their spending ability, leading them to opt for healthier and premium products in the F&B segment. Moreover, the government anticipates 27.3mn international arrivals of tourists in 2024, which is expected to boost the sales volume of the companies such as Spritzer. On the cost front, we believe that companies under our coverage that heavily import their raw materials will benefit from the favourable USDMYR exchange rate coupled with some moderation in key commodity prices, with the exception of cocoa and coffee beans. The F&B players under our coverage that are likely to benefit the most from this are FFB and Spritzer.

Prefer Value-for-Money Retailer.

In the discretionary segment, we believe that retail operators offering value-for-money items and services will benefit the most. Among the companies under our coverage, those with smaller basket sizes, such as MRDIY, AEON, and Padini—with average basket sizes of approximately RM26, RM64.20, and RM100, respectively—are likely to benefit from higher disposable income. On the cost front, we believe that the strengthening ringgit will benefit companies like MRDIY, where circa 70% of their sales come from products purchased in Chinese Yuan Renminbi (CNY).

Upgrade to OVERWEIGHT on Consumer Sector.

We upgrade our rating on the consumer sector to OVERWEIGHT, supported by anticipated higher domestic demand driven by: i) a stable employment rate, ii) increased disposable income (boosted by generous cash handouts, EPF Account 3 withdrawals, and civil servant wage hikes), and iii) expected higher tourist arrivals. Additionally, we anticipate better profit margins due to the moderation in key commodity prices and a strengthening ringgit. However, the downside risk to our rating lies in the uncertainties surrounding the implementation and impact of SRI, particularly regarding RON95, which could significantly tighten consumer spending. Our top pick for the consumer sector is MRDIY (BUY, TP: RM2.49). In the staples segment, we also favour FFB (BUY, TP: RM2.02) and Spritzer (BUY, TP: RM2.90).

Source: BIMB Securities Research - 3 Sept 2024